What is matching concept in finance & accounting?

Matching concepts tells about expenses incurred during a period to be recorded in the same period in which revenues are earned. Revenues and expenses in income statement are matched for a period of time. Investors get a better idea about economics of the business.

Product cost − These are tied directly to products and in turn revenues.

Period cost − These don’t have corresponding revenues.

Commission − If an employee earned x% of commission on sales in current month and that commission is paid in next month, then that transaction is recorded in present month.

Depreciation − If a company buys a machine and its life is 8 years. Then, cost of equipment is recorded in depreciation expenses at the rate of cost per year.

Employee bonuses − It is based on employee performance in that financial year he/she will earn bonus in that year and will be paid next year.

Benefits of matching concept includes −

• Consistency in financial statements.
• To avoid misstating profits for a period.
• Balance cost over a period of time.
• Long term assets experience depreciation.

In the above table, last entry made in Feb 2, but a temporary entry made in Dec 31^st which is the actual payment date. Since, it is close of the month and the actual transaction is made on Feb 2^nd another entry is made on Jan 22^nd but the actual amount is received on Jan 27^th.

Similarly, contract was received on Jan 23^rd and cash was paid as well, so it has to be entered on same date instead of Feb 2^nd where contract was carried out.